Dollar holds gains vs. euro despite weak sentiment

Greenback mixed against other rivals, but pushes higher

By

WilliamL. Watts

LisaTwaronite

SAN FRANCISCO (MarketWatch) -- The dollar was mixed Friday, but managed to push higher against the yen and euro throughout the U.S. session, shrugging off the initial effects of a downbeat consumer sentiment report and a spike in oil prices.

The University of Michigan/Reuters' consumer sentiment index declined to 62.6 in April -- the lowest level in 26 years -- from 69.5 in March. Economists surveyed by MarketWatch were looking for a final April result of 63.0. See Economic Report.

The dollar was also pressured by surging crude oil prices, which spiked after news reports that a U.S. cargo ship in the Persian Gulf fired warning shots at a boat it claims came too close. Crude futures ended up 2.1%. See Futures Movers.

While the dollar ended down from global session highs, "the worst appears to be over for the greenback. Risk appetite has been on the rise, perhaps as the market continues to price out Fed cuts, and price in a bottom for the U.S. economy," wrote currency analysts at Action Economics.

The dollar's gains against the euro came as investors await next week's U.S. Federal Reserve meeting on April 29-30 to decide on interest rates. Most analysts expect a 25 basis-point cut to its benchmark rate, from the current 2.25%, and say it's possible the central bank could suggest its easing cycle is at or near an end.

The May fed funds futures contract Friday was implying a 76% chance of a quarter-point cut, down from an 80% chance Thursday.

Lower interest rates weigh on a currency because they reduce the returns on assets denominated in that currency.

In late North American trading, the euro was buying $1.5625, down from $1.5682 in late trading Thursday, but up from an earlier session low of $1.5553. See real-time currency prices.

The dollar index, which measures the U.S. unit against a basket of six major currencies, was at 72.670, up from 72.539 late Thursday.

The dollar bought 104.49 yen, up from 104.21 yen late Thursday.

But the dollar remained lower against the British pound, which was at $1.9851, up from $1.9737 late Thursday.

Eurozone concerns

In European trading, the euro was pressured by concerns the European economy is showing some early signs of a slowdown.

The euro saw a sharp one-day plunge against the U.S. dollar Thursday, fueled in part by a larger-than-expected decline in the Munich-based Ifo Institute's German business sentiment index and ideas the Federal Reserve may be set to slow the pace of interest-rate cuts. Expanded global coverage.

The European Central Bank on Friday said money supply growth decelerated in March, but continued at a robust level. Broad M3 money supply grew at a 10.3% annual pace in March, down from 11.3% in February and largely in line with expectations.

While the figure wasn't much of a surprise, signs of a modest slowing in growth may "help reassure the ECB a little bit" about price pressures, said Kenneth Broux, an economist with Lloyds TSB.

The euro is ending the week in retreat from its all-time high set just above the psychologically and technically significant $1.60 level Tuesday, when it rose to $1.6020. That was its loftiest level since it began trading in January 1999.

Those gains were propelled in part by hawkish remarks by ECB governing council members, including Christian Noyer, who hinted that worries about price pressures and a determination to bring consumer inflation back down toward the ECB's annual inflation target of just below 2% could even prompt a rate hike.

Noyer later protested that his remarks had been "over-interpreted," and comments by other top policymakers, including ECB President Jean-Claude Trichet on Thursday, were viewed as offering a slight change in tone toward a less hawkish stance. See related story.

"I can almost imagine the phone line lighting up between the ECB in Frankfurt and the Banque De France in Paris with an enraged Trichet calling Noyer to take back his comments that a rate hike might happen," wrote Brian Dolan, chief currency strategist at Forex.com.

While the ECB isn't expected to cut rates, the shift helped tamp down ideas that a rate hike was a possibility, analysts said.

Although signs of a major euro-zone slowdown have yet to emerge, markets are on the lookout for indications global credit crunch and other factors could begin to weigh on the economic performance of Germany, Europe's largest economy.

Thanks to the impact of the strong euro on exports "and high oil prices, some cracks -- albeit small -- have begun to appear across the German economic landscape," said Neil Mellor, a currency strategist at Bank of New York Mellon.

The British pound was higher against the dollar, however, gaining after the Office for National Statistics said gross domestic product grew by 0.4% in the first quarter, for an annual growth rate of 2.5%. The figures were in line with consensus market forecasts.

Fed to drive the crosses

But the euro/dollar trade is likely to be driven in the near term by U.S. data and expectations surrounding the Fed's upcoming April 30 rate decision, analysts said.

A narrowing spread between two-year U.S. Treasury note and German bund yields -- led by a rising U.S. yield -- could indicate markets see a reduced chance of a rate cut next week, Broux said.

"There's certainly been a change in momentum, and a change in perception of the bond market," he said.

Further direction is likely to be determined by U.S. data to be released next week, including the closely watched Institute of Supply Management purchasing managers data and the Fed decision, he said. U.S. economic calendar.

A firmer tone in European and Asian equities helped lift the dollar Friday, analysts said.

The Japanese yen also felt pressure as Japanese government bonds fell sharply Friday. See full story.

Bonds fell after Japan's core consumer prices accelerated at their fastest pace in a decade in March on higher food and transportation costs. See full story.

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